FOREX EUR/USD Fundamental analysis
The US dollar is preparing for a new record monthly growth, awaiting the decision of the Federal Reserve System (FRS). In the last three meetings, FOMC members discussed the possibility of raising federal funds rates, but now the question is when and at what pace to reduce them. In January, investors drove the EURUSD too high with their forecasts and when expectations were not confirmed, the pair had to fall sharply. Will the bearish trend continue?
When EUR/USD reached five-month highs at the end of December, the possibility of continuing the uptrend was actively discussed in the market. It was said that the European Central Bank (ECB) would outpace the Fed in terms of monetary expansion, and eliminating the divergence of economic growth between the United States and the Eurozone would hit the dollar, pushing the EURUSD pair even higher. Given that the growth of US stock indices through currency correlation stimulates risk appetite and puts pressure on the dollar, the conditions for strengthening the euro seemed quite feasible.
Indeed, the divergence of economic growth has reached its maximum since 2013 (excluding the pandemic): Eurozone GDP grew by 0.5%, while American GDP expanded by 2.5%. The IMF forecast assumes a reduction in the discrepancy in 2024, with the economy of the currency bloc growing by 0.9% and the United States by 2.1%. However, until there are signs of a decline in US macroeconomic indicators and an improvement in the situation in Europe, the EURUSD may continue to decline.
The US's resilience to the most aggressive monetary policy of the decade allows the Fed to delay rate cuts. Investors expect Jerome Powell to be cautious, allowing Christine Lagarde to get ahead of him. For example, the Federal Reserve will begin a monetary easing cycle in May, and the ECB in April. Such a scenario seems possible after the statement by Joachim Nagel, one of the key "hawks" of the Governing Council of the Bundesbank, that the ECB has adequately dealt with inflation.
According to Deutsche Bank experts, the fate of EURUSD depends entirely on market expectations of a March reduction in federal funds rates. With a 50/50 probability, EUR/USD should trade around $1,087. An increase in the probability to 100% will push the main currency pair to 1.108. A decrease in the probability to zero will lead to its fall to 1.066. In this case, the first FOMC meeting in 2024 and the January report of the US labor market may have a significant impact on EURUSD.
Before important events, the pair failed to gain a foothold above the key level of 1.085 due to factors confirming the strength of the American economy. The consumer confidence index has reached a two-year high, and the number of vacancies has unexpectedly increased. At the same time, the risks of a new round of inflation have significantly increased, and in this case the Fed may return to the idea of raising rates.
If Jerome Powell expresses concern about this, investors will start selling EURUSD, which may lead to a decrease in the asset to 1,079. We consider purchases when the price is fixed above 1.085 and under the mandatory condition of the "dovish" rhetoric of the head of the Fed.
EUR/USD Technical Analysis
EUR/USD remains in the format of a short-term "bearish" trend Today, the pair is declining, aiming for a minimum on January 29. In case of updating this mark with consolidation below, the next target of sellers becomes the area 1.0719 - 1.0702.
If an upward correction begins from the current quotes, we may see an update of the previous day's maximum with a test of the resistance zone in the range of 1.0888 - 1.0880. Here we will look for the possibility of new sales in the direction of the January 29 minimum.